Officials investigate big banks’ role in internet payday lending

As we have written previously, payday loans that come by way of the internet have become a major problem. These payday loans have very high interest rates and other exorbitant fees, causing the borrowers financial trouble. There have been complaints that major banks assist in predatory Internet lending practices by allowing companies to operate illegally in states in which they are banned.

Internet payday loans are loans that are expected to be paid back with the borrower’s next paycheck, usually in two weeks. In other words, they are advertised as short-term loans. If the borrower does not advise the lender that he or she intends to make a full payment and close the loan prior to the end of the term, the lender often only withdraws the interest and renews the loan for another month. The assumption on the part of the lender, under that practice, is that the borrower will only pay the interest and the loan can be renewed. That’s true, even though the loan is only intended to be until payday. All too many of the borrowers simply can’t afford to pay back the loan in two weeks. In those cases, the decision to renew the loan is made by the borrower.

While some states have laws against payday loans, their availability over the Internet has made regulation of the loans difficult. Folks who live in states that prohibit payday loans can easily apply for them online, and may not realize they live in a state that has banned the loan. Large banks are not the lenders in these situations. Rather, the loans come from payday loan companies. But the banks play a role if they allow the lender to automatically withdraw money from the borrower’s account. While that might not sound all that bad, the banks can make a lot of money off these automatic withdrawals.

If there is not enough money in the customer’s account to cover the automatic withdrawal, the withdrawal can trigger insufficient fund fees, overdraft fees or other financial fees, making money for the bank. According to a report by The Pew Charitable Trusts, 27 percent of borrowers are forced into overdraft by an automatic withdrawal from a payday lender. You can get the report, How Borrowers Choose and Repay Payday Loans: Payday Lending in America, by going to pewstates.org.

Some customers complain that banks still allow these automatic withdrawals even after a customer has requested the withdrawals be stopped. The New York Times reported on one customer who requested a bank close her account to stop the automatic withdrawals. The bank, however, left the account open and from April to May, the customer racked up more than $1,500 in fees linked to payday lender automatic withdrawals. NBC News reported on a man who initially borrowed $400 for a car repair but wound up taking out $3,000 in loans to cover interest costs, owed $12,000 and was kicked out of his apartment. Officials are now looking into what role the major banks play in allowing payday lenders to do business in states where such companies are prohibited.

Sources: Lawyersandsettlements.com; New York Times; NBC News and pewstates.org